ANALYSIS - Iran's internal struggle damps hopes for dialogue

By Alistair Lyon, Special Correspondent

BEIRUT (Reuters) - The struggle by Iran's hardline leaders to quell dissent after a fiercely disputed election bodes ill for U.S. President Barack Obama's offer of direct engagement to overcome 30 years of mutual rancour.

And the darker prospect of military action resurfaced when Vice-President Joe Biden declared on Sunday that Israel had a sovereign right to determine what is in its interest in dealing with Iran's nuclear ambitions, whether Washington agreed or not.

Iran says its nuclear work is purely for civilian purposes and the incoming head of the International Atomic Energy Agency, Yukiya Amano, said last week he had seen no evidence to the contrary in the U.N. nuclear watchdog's official documents.

Obama has made clear the door to talks remains open, despite his concern about the aftermath of Iran's June 12 presidential poll, marked by the dispersal of mass protests, the arrest of hundreds of reformist figures and threats to put them on trial.

"We've got some fixed national security interests in Iran not developing nuclear weapons, in not exporting terrorism," he told The New York Times on Saturday. "And we have offered a pathway for Iran to rejoining the international community."

But the chances of a positive response from Supreme Leader Ayatollah Ali Khamenei and his passionately anti-Western protege, President Mahmoud Ahmadinejad, look dubious.

"By mishandling the election badly, the hardliners did maintain state power, but lost a lot of negotiating power," said Farideh Farhi, a visiting scholar at the University of Hawaii.

She said Iran's leaders faced two awkward options. Until domestic turmoil had calmed, decision-making might be paralysed.